What Does GAP Car Insurance Cover and What Does It Exclude?

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If you are transitioning from an older car to a new one, or maybe buying your first car, it is a good idea to learn about what GAP car insurance covers and when you need it. Finding cheap car insurance when you are insuring a new car is always one of the things you look for, but you also want to make sure that the insurance you buy covers you fully and doesn't leave you out of pocket in a claim.

When you buy a new car, one of the options you can consider is whether or not to purchase GAP car insurance. Here is what you need to know about what GAP insurance covers to decide if you should buy it (or not).

What Is GAP Insurance?

GAP (Guaranteed Asset Protection) insurance is optional coverage. To understand GAP Insurance, you first need to understand that on a standard car insurance policy, your car is covered for the actual cash value or depreciated value at the time of a claim.

GAP insurance is an optional type of car insurance coverage that provides supplemental coverage for the difference between the actual cash value (ACV) of your car and the amount you owe your lender or leasing company at the time of a claim. GAP will provide you with enough money to cover the difference between what is owed for the car, and what the insurance company pays out in the event of an accident or loss. Learn more about GAP insurance requirements and your rights.

How GAP Insurance Works: GAP Insurance Example

If you have an accident and need to replace your car, a standard car insurance policy will pay the actual cash value. If that actual cash value is $10,000, but you owe $13,000 on your auto loan or if it's the lease buy-out value, then without GAP insurance, you will owe the difference of $3,000 even though you no longer have the car.

Although some car leases have GAP clauses or a GAP waiver agreement that may forgive the difference, a loan will not forgive the amount of money you borrowed to buy your car, and they will hold you responsible for paying back your loan. GAP car insurance will give you the money you need to pay back the remainder of the loan or lease so you do not end up paying out of pocket.

In this example, your car insurance would pay the first $10,000, and then your GAP insurance would give you the remaining $3,000, and you would come out even.

GAP Insurance Example

  • You owe $13,000 on your car, and you have a total loss accident.
  • Car insurance pays ACV $10,000, and you still owe $3,000 on your car loan.
  • The difference of $3,000 is paid by your GAP insurance.

Most GAP insurance does not include coverage for the deductible, but some insurers will offer it. When shopping around for your GAP insurance, be sure to ask if the GAP will cover the deductible or not.

What Total Loss GAP Car Insurance Covers

GAP insurance covers damages that are insured by your standard car insurance, some examples include:

  • Theft
  • Fire
  • Vandalism
  • Accidents
  • Flood
  • Tornado
  • Hurricane

GAP car insurance works with your basic comprehensive and collision insurance on your car. You need to have a basic car insurance policy before GAP insurance pays in a claim. Some GAP car insurance policies will also cover your insurance deductible.

What Does GAP Car Insurance Exclude?

Understanding the details of your GAP car insurance is crucial because there are coverage gaps that exist. These gaps include things that you're probably not aware of. Below are the most common exclusions for GAP car insurance.

6 Common GAP Car Insurance Exclusions to Ask About

Here are some possible exclusions of GAP Insurance for you to ask about so that you will not be surprised by a lack of coverage at the time of a claim. Ask about these common exclusions or clauses to find out if you can add coverage by an endorsement:

  1. You need to have basic car insurance coverage before GAP insurance will kick in, so cars that are not covered by both comprehensive and collision insurance will not be eligible for the GAP insurance payout or coverage.
  2. Any equipment on your vehicle that was not installed in the factory is not necessarily covered.
  3. Since GAP insurance covers the difference between what you owe, and what you are paid in an insurance claim, if you put down money on the car loan such as money from a trade-in or a leased car, then you might not be able to recover that in a total loss or claim. GAP insurance is not "replacement cost insurance."
  4. Incurred costs for any other products that you add to the loan or lease like extended warranties.
  5. Any of your unpaid or overdue lease or loan payments.
  6. Any financial penalties or security deposits on your leased vehicle.

These are only examples of typical coverages and exclusions that you may find in a GAP insurance policy. Insurance coverages change over time, and some products will cover more things and add bells and whistles to attract you as a customer, so use the checklist above to ask the right questions and be sure to check your own policy to see what your specific GAP car insurance coverages and exclusions are. Some insurance products will offer you more perks and benefits, and others may not.

Article Sources

  1. NAIC. "NAIC Consumer Shopping Tool for Auto Insurance." Page 5. Accessed June 25, 2020.

  2. Insurance.com. "What to Do If Your Car Is Stolen." Accessed June 24, 2020.

  3. New York State Department of Financial Services. "Conditional Gap Waiver Provision." Accessed June 24, 2020.

  4. Insurance Information Institute. "What is Gap Car Insurance?" Accessed June 24, 2020.

  5. Americal Family Insurance. "What is Auto Gap Insurance and What Does it Cover?" Accessed June 24, 2020.

  6. Nationwide. "Gap Insurance Coverage." Accessed June 24, 2020.

  7. American Family Insurance. "Gap Car Insurance Coverage." Accessed June 24, 2020.